Tax attack could end frequent-flyer boom
 

Tax attack could end frequent-flyer boom
By Alex Mitchell
July 25, 2004
The Sun-Herald

Tax Commissioner Michael Carmody has ordered a crackdown on business executives using their credit cards to accumulate vast numbers of frequent flyer points.

Anyone who collects more than 250,000 frequent flying points in a year will be subject to a special tax inquiry by "a senior technical leader", Mr Carmody said.

The ruling will alarm the growing number of executives who use their credit cards to pay for business expenses - fares, hotel accommodation, meals, telephones, stationery and office equipment - and earn hundreds of thousands of frequent flyer points.

This legal practice is the main selling point of the many customer loyalty programs linked to free air travel. If the rewards become subject to tax, experts say it will be the beginning of the end for frequent flyer programs.

Those executives who accrue 250,000 frequent flyer points would be able to use them for a return business-class seat from Sydney to London (220,000 points), two return first-class seats from Sydney to Bangkok (250,000) or a return first-class seat to Los Angeles (200,000).

Mr Carmody has urged inspectors and auditors to watch out for "contrived and artificial" arrangements where business people put everything on their credit cards solely to raise as many frequent flyer points as possible.

He emphasised that income tax should be paid where frequent flying points are "assessable income", forming part of an employee's salary package and fringe benefits tax where the points are a non-cash benefit to an employee. ATO staff should also check salary package arrangements that suggest "the [frequent flyer] rewards are being received in substitution for income which would otherwise be earned".

National Tax and Accountants' Association acting president Robert Warnock said the ATO's guidelines would cause "great concern" in the business community. "It sends a message that the ATO is going to attack this practice," he said.

Another tax specialist said the ATO would "kill" the frequent flyer points system if it went after taxpayers who used credit cards to pay for their business overheads.

"If the ATO is going to tax the reward of frequent flyer points, then people are going to ask what's the benefit of belonging to loyalty programs," he said.

This is in Australia, I'm guessing.

One already pays taxes, security fees and other fees when redeeming so-called “free” tickets using frequent flier miles.

On most credit cards where one earns miles in a frequent flier program, one usually pays an annual fee — sometimes a hefty one.

If one also has to pay additional taxes on acquiring and redeeming frequent flier miles, I would then tend to agree — what is the point?

Yes, Australia.

Think we've got a few flyers from that neck of the woods.

I know we have lots of Oz people here, it's just that this subject has come up again and again in the States.

I'm afraid the crackdown is a fool's errand and the US Internal Revenue Service has already concluded as much. Of course they would love to tax FF miles and awards as "income." But the value of an FF mile varies so wildly depending on redemption context, there's no fair yardstick. And if you decide, as this Australian official thinks, that loyalty rewards are taxable income, you open a Pandora's Box of ridiculousness. If you can tax the miles (and trips) I earn while flying for work, you can go after the 11th latte I get for free after buying 10, the money I saved on groceries by swiping my frequent-customer card and getting a preferred pricing tier, the fruit basket I get from a hotel manager for staying there a lot...

It's utterly unadministratable. Fortunately.

How strange ! Are we supposed to pay cash ? How much cash would you have to carry to pay expenses rewarding you with 250,000 FF points ?

Also being discussed on the Qantas forum here and here

Let me guess... 250,000 dollars ? :) If it's limited to 250,000 miles gained through paying expanses, it won't concern a lot of people, if it's 250k a year, total, before they start looking for possible tax fraud, it will cost a lot of money compared to potential gain ? Unless Australian tax administration is especially efficient.